Canada

Ontario ponders future without local content

CANADA: Developers and financiers have welcomed Ontario's forced move away from domestic content, yet the willingness of turbine makers to set up shop in the province helped kickstart Canada's wind industry. So what happens now?

The termination of domestic content requirements in Ontario, following a failed appeal against a World Trade Organisation ruling, will simplify things for developers and their financiers, but questions remain about how manufacturers drawn to the province by the promise of a captive market will fare as the government revamps its green-energy policies.

"A number of companies have come into Ontario and invested in the belief that it would allow them a market share," says Valerie Kuhns, a representative of the Ontario Clean Technology Alliance, a group of local development agencies that joined forces to attract renewable-energy manufacturing investment to their communities. "With the changes in the regulations, that is not necessarily going to be the case now. I'm sure they are looking at their business plans and wondering what the market opportunity is in the long term."

Ontario launched a groundbreaking feed-in tariff (FIT) programme in 2009. It was the first North American jurisdiction to adopt the policy framework that had helped drive wind deployment in Europe and elsewhere. But coming as it did on the heels of a global financial crisis that hit the province's traditional manufacturing base hard, the programme was as much about job creation as green energy.

The government set rules requiring minimum local content levels of up to 50% for wind projects contracted under the FIT. It also signed a controversial C$7 billion (US$6.7 billion) deal with a Samsung-led consortium, exchanging 2GW worth of wind power purchase agreements for the promise of two factories to produce turbine components.

Kickstart for wind sector

The policy succeeded in kickstarting a nascent wind manufacturing sector. As part of the Samsung deal, Siemens opened a blade plant in a mothballed automotive parts factory in Tillsonburg, while South Korea's CS Wind invested in a tower factory in Windsor. Other major global suppliers followed suit, including Enercon with a plant producing converters and control panels, Repower Systems with a blade production factory, GE with the addition of hub production to an existing plant that makes large industrial motors, and Shanghai Taisheng Wind Power Equipment with a tower facility. A number of Ontario-based companies have also entered the supply chain. In all, says the Canadian Wind Energy Association (CANWEA), more than 1,000 Ontarians now work in wind-related manufacturing.

"Whether those jobs are sustainable and whether they represent a sustainable shift in our economy is a good question," Adam White, president of the Association of Major Power Consumers, told delegates at CANWEA's recent annual conference in Ontario.

White's doubts arise from the recognition that the market underpinning those jobs is in upheaval. Last December, in response to complaints from the European Union and Japan, the World Trade Organisation (WTO) ruled that Ontario's local content rules violated international trade law. Canada appealed on behalf of the province but lost, and although the WTO decision is not legally binding, energy minister Bob Chiarelli has promised Ontario will comply. That was in May.

Chiarelli cancelled the FIT programme for large-scale renewable-energy projects and, as an interim step, cut back on domestic content thresholds for small projects. As the province wrestles with supply surpluses and rising power prices, the Samsung deal has not gone unscathed. In June, the Ontario government announced it had renegotiated the agreement, slashing Samsung's wind build-out by almost half to 1,069MW.

Resilience

The situation has created significant uncertainty for manufacturers in Ontario, but Chiarelli expects the province's fledgling supply chain to continue to be viable, even as the market opens to competitors not bound by the need to invest in Ontario-based facilities.

"We have confidence in the resilience of the clean-energy manufacturing sector in Ontario," he said. "Since becoming minister I have visited and met with a number of manufacturers, and many have both strong local and international connections."

Much will depend on where the Ontario market goes from here, CANWEA's October conference speakers agreed. The province is in the midst of reviewing its long-term energy plan. "The more transparency we can put into that document, in terms of timelines, targets and the broader framework of the programme, it will go a long way to validating what we still see as an overwhelmingly strong business case to be here," said Adrienne Downey, operations and business development manager at Enercon Canada.

A domestic market is essential, said Georges Arbache, a principal at KPMG. "I think it's a bit unrealistic to expect the supply chain to be able to sustain the level of manufacturing they have by exporting their products."

The WTO ruling will not affect the approximately 3.6GW of FIT and Samsung projects that have contracts but have yet to be built, preserving the market for local manufacturers at least in the short term. But even there, uncertainty is creeping in. In-service dates are looming and the Ontario Power Authority, which administers the contracts, seems disinclined to grant extensions.

"We're not really sure when the projects will be ready, and also not necessarily sure whether the contracting authority is genuinely supporting those contractors," said Downey. "A contract that is awarded is not necessarily a contract that is built. There's been a considerable amount of attrition in Ontario, and in markets across Canada. That is incredibly challenging as a manufacturer to deal with."

Simpler without

However, lenders participating in a conference finance session called the WTO decision a positive development, saying domestic-content rules complicate both the development and the financing equation. "It is a huge obstacle that needs to be managed. So if that goes away, it would be a positive," said Carmelo Restifo, a director at Union Bank.

"I think the developers and the independent power producers in the room would actually welcome (the end of domestic-content requirements) more than the lenders. They are the ones who have to go out and negotiate contracts and spend many, many hours on meticulous detail to make sure they are not in violation. We lenders are looking over their shoulders to ensure they are doing what they are supposed to be doing."

But Bill Sutherland, senior managing director of project finance for Manulife Financial, questioned how willing policy makers will be to support continued wind development without guaranteed jobs being attached. "If you are not able to protect that domestic content, then is public policy going to be as adamant about supporting the industry?" he asked.

The local content rules actually helped focus the market in a way that aided both lenders and developers, argued Arbache. Before the FIT programme was introduced, there were many new market entrants circling the province that financiers were not prepared to fund because they lacked a North American track record, he added. "You saw a pretty substantial retreat of non-bankable manufacturers exit the market," Arbache said. "Now we have this, I think, interesting portfolio of manufacturers that are established here, that offer bankable solutions to developers with an established supply chain. It's not helping costs, but from a bankability standpoint, it is a positive."

Higher costs are a concern in jurisdictions that limit who can play in their markets, speakers noted. "For a manufacturer like GE it is about balancing the need for technology advancements to lower the cost of wind energy with implementing local-content requirements," said Guy Crepeau, GE's northern regional sales manager. "We believe that every market requires competition in order to lower the cost of electricity."

As Canada's wind energy industry looks west to markets such as Alberta and British Columbia, where electricity demand is growing, industry participants agree that their governments can learn from Ontario's experience. "The best elements of the east have enabled the maximum number of players to participate, and the best sites and the cheapest power to rise to the top," said Peter Clibbon, senior vice-president at RES Canada.

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